Structural Obstacles to Economic Adjustment

INTRODUCTION

Two aspects of the problems of economic adjustment in the MENA region have been highlighted in the recent literature. The first one relates to the slow pace of structural reform in the region compared to other parts of the world, e.g., Latin America, Central and Eastern Europe and even parts of Sub-Saharan Africa. The second pertains to the apparent lack of commensurate supply response in situations where limited economic reform has been introduced. This is reflected, for example, in low rates and slow growth of private investment and low rates of foreign direct investment inflows in the region by international standards (World Bank 1995; Page 1998; Riordan et al. 1998; Hoekman 1998; El-Erian and El-Gamal 1997).

The explanations for the first problem, namely, the apparently slow pace of economic reform, have been sought in various political and socio-cultural attributes of the countries in the region (Waterbury1998). The explanations put forward for the second aspect of adjustment problems, namely the weak responses by domestic private capital and foreign capital to reforms, attribute the lack of credibility of the liberalization measures introduced or announced by thegovernments in the region to the gradual and slow pace of reform(Shafik 1998; Hoekman 1998). Indeed, various authors have suggested that perhaps joining multilateral pacts like the membership of WTO or the European Union Mediterranean Initiative would enhance the credibility of the gradualist approach to reform in the region.

In this chapter, I will argue that the reasons for the slow pace ofreform in the MENA region may have more to do with the underlyingstructures of these economies -- arising from their resource endowments and their past experience of development as well as external economic constraints facing them -- rather than the idiosyncrasies of their political systems. Since politics is very much country specific, in order to explain general tendencies at the regional level, perhaps it would be more plausible to start from the shared structural features of the economies in question rather than making overgeneralizations about political tendencies at a regional level. It would be absurd to maintain that different countries share the same political predilections merely because they are located in the same region. I also argue that the question of credibility of economic reform is as much the outcome of the conformity of the pronounced reforms with the objective economic conditions which make such reforms effective. A reform programme which is devised without due consideration to the underlying structural constraints of the economy, even if it offers large immediate incentives to the business community and even when it is implemented with speed and by a ruthlessly resolute government is unlikely to instill the type of confidence which is necessary for thelong term commitment of investment by the private sector.

One of the key issues of economic adjustment in the MENA region; since the early 1980s, the so-called post-oil boom period, has been the necessity for the countries in the region to develop alternative sources of foreign exchange revenue by improving their competitiveness and diversifying their export base. Trade liberalization is the linchpin of the proposed reforms, which are meant to shift the region's growth strategy from a protectionist, public sector dominated one to an export-led strategy in which the private sector plays a more prominent role. Nevertheless, very little research has been done on the type of activities in which the MENA countries may have a comparative advantage. In most of the literature it is assumed, either explicitly or implicitly, that under a liberalized trade regime, with other appropriate adjustment policies in place, the market will automatically take care of competitiveness issues and an appropriate structure for trade. In this chapter, I argue that under the present conditions in the world economy where important changes are taking place with the implementation of the Uruguay Round agreement, and where themajor market for the MENA region exports, i.e., the European Union, has been very selective in import liberalization, it is important to have some idea of comparative advantages in the MENA economies before advocating drastic liberalization attempts. Such an understanding would be also necessary to predict and cope with the dislocations that trade liberalization may create in the short to medium run. It can alsocontribute to understanding the reasons for the slow pace of reform in the MENA region, and the apparent lack of credibility of reforms referred to above.

The purpose of this chapter is not to conduct a detailed analysis of the disaggregated lines of activity in which various MENA countries may have, or may be able to develop, comparative advantages. It is rather more concerned with broad sectoral patterns of specialization and trade, and the constraints imposed by general levels of resource availability as well as by international trade agreements.